| | | The United States1. Wednesday started with the release of the ADP private payrolls report, which is usually (but not always) a good predictor of the official employment report from the Department of Labor. The ADP figure was surprisingly strong, with 263k new private jobs created in March.
The current consensus for the official private payrolls figure (to be released on Friday) is 170k. A number similar to what ADP is showing will get the Fed officials more concerned about tightening labor markets.
Here is the ADP summary graphic showing strength in small business hiring as well as construction and manufacturing sectors.
Source: ADP
Below are the total US manufacturing and construction jobs over time (according to ADP). Notice the pop in the last couple of months. Construction jobs have really popped upward since 2015
Another surprising change in the ADP report was a multi-year high increase in financial services jobs. Yea.....everyone get back in the investment banking and Financial Advising waters...... the liquidity is so
refreshing!!!!
Some have suggested that this increase is related to mortgage activity. While mortgage applications for home purchase continue to rise, the trend remains relatively modest.
2. Of course, the big news of the day was the release of the FOMC minutes. The Fed surprised the markets by suggesting that the reduction of its massive balance sheet will begin later this year. The Committee members discussed ending the reinvestment of both Treasuries and mortgage bonds.
Source: FRB
Also, some FOMC members have become concerned about frothy stock market valuations and rallies in other risk assets. Reducing the balance sheet is certainly one way to deal with asset bubbles.
Source: FRB
Paul Ryan's concurant 2 PM comments about tax reform being further in the distance than we were hoping gave the big whammy multiplier effect to the FED's hawkish talk.
The probability of three or more rate hikes in 2017 fell back to 50%. When the Fed stops reinvesting its holdings, it will probably pause on rate hikes to make sure the policy change is not too disruptive.
3. For the first time in months, we had a meaningful pullback in the stock market in response to policy news from the Fed. Here are the S&P 500 futures with the biggest reversal in over a year.
The next chart shows the jump in VIX futures, which remain very low given the level of uncertainty. ---way to low to
my way of thinking.....
4. Ending the reinvestment of securities on the Fed’s balance sheet should be a net negative for Treasuries and MBS bonds. However, the Treasury curve flattened further, and Agency MBS rallied.
5. US service sector data came in below consensus. While the expansion continues, the activity levels seem to have peaked.
• The ISM non-manufacturing index declined, although the level remains solid.
Employment in services seems to have slowed, which is inconsistent with the ADP report (above).
Here is the ISM summary.
Source: ISM
• The Markit service sector activity index was even weaker, suggesting that the total private sector employment growth was the smallest since last October. Again, this is inconsistent with the ADP report (above).
Source: IHS Markit
6. What do institutional investors think about the likelihood of the Trump/GOP agenda being implemented? Here is some data from Credit Suisse.
• Tax reform is the most likely to get done. Notice Health Care is the quagmire with only a 9% belief that something meaningful gets done.
Source: Credit Suisse March 2017 Buy Side Survey
Below is more detail on what investors think about the timing of the reform.
Source: Credit Suisse March 2017 Buy Side Survey
As a comparison, here are some results from Merrill Lynch.
Source: BofAML, @joshdigga
• How low is the US corporate tax going to be after the reform?
Source: Credit Suisse March 2017 Buy Side Survey
7. Finally, we have some updates on the auto sector.
• As discussed before, auto inventories are elevated. This chart shows the inventory-to-sales ratio, which is the highest since 2009.
• According to a Fed survey, more bank loan officers have been tightening credit for auto loans.
• Auto loan rates, while still low by historical standards, have been rising quickly this year.
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